Eisner May Field a Few Slapshots at Disney Meeting

Standing on a stage over a floor covering the Pond’s ice rink in Anaheim, in front of a potential crowd of as many as 14,000 shareholders, Walt Disney Co. Chairman Michael Eisner today for a couple of hours gets to feel what it’s like to be Guy Hebert.

Hebert is the goalie for Disney’s Mighty Ducks of Anaheim, someone who earns a good living showing up at the Pond to let bruising hockey players shoot rock-hard rubber pucks at his body 30 or so times a night.

Eisner earns a good living as well and, once a year, has to face stockholders because he’s head of a publicly held company. In the past, he’s usually had softballs lobbed his way that he could hit out of the park. This year, he may face slapshots. Despite the stellar performance of Disney’s stock lately, and the sweetener of freebie Disneyland passes offered to those attending the meeting, a growing number of stockholders are irate about some recent developments at Team Disney.

One can imagine the action:

Whack! . . . “Why did you shell out a severance deal now worth more than $90 million to pay off former President Michael Ovitz?”

Whack! . . . “What about your own staggering pay package, which has the potential to be worth several hundred million dollars in the next decade?”

Whack! . . . “Doesn’t all this prove your board of directors is a bunch of patsies, a rubber stamp for your decisions?”

The reality is that the immediate worst-case scenario for Eisner is that he’s in for a long morning. Maybe a shot or two will get through and bruise him. There were even rumors floating around Disney last week that several executives were fretting that Eisner could get booed.

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Disney’s stockholders will vote overwhelmingly to elect directors, and will approve Eisner’s contract, huge as it is. They also will vote down two resolutions, one tying pay to social and environmental causes and another aimed at stepping up the monitoring of potential use of overseas sweatshops. Eisner and Disney executives will go home, getting every victory they wanted.

“The worst thing that could happen, which would drive the stock right down, would be to have the five directors not elected, Michael Eisner’s contract negated and then we lose Michael Eisner,” company board member Raymond Watson said.

It’s a given that the majority of stockholders care most about whether their investment is earning a good return, and Disney’s are happy that the stock has been going up. This isn’t Disney rivals Time Warner or Viacom, whose stock prices travel horizontally. Even those companies face surprisingly little flack at their annual meetings given their lackluster results.

But the shareholder protest game isn’t like a public election. Anything less than a near-unanimous vote of confidence in a board is a moral victory for critics. The intent is to make a statement, send a message and maybe generate enough bad press and uneasy feelings to get some action.

“The business press might write that 97% voted a resolution down. We say that if you can get 3% to focus on it, given how hard it is to get the attention of shareholders, that it’s a kind of victory” said Conrad MacKerron from dissident Disney shareholder Progressive Asset Management, which holds 265,000 shares.

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Really big shareholders don’t have to air their discontent at stockholder meetings. Warren Buffett of Berkshire Hathaway and Gordon Crawford of Capital Research don’t stand up at a meeting and speak their minds. If they have a problem, they get Eisner on the line and tell him one-on-one.

Leave it to a growing number of restless pension funds that are resorting to the practice of airing their anger, in part to put corporate governance on center stage. Where better to do that than at a meeting of what is arguably the most closely watched company in America?

Victory will then come if a couple of additional high-powered board members with no real personal ties to Eisner and Disney are eventually named. Although Disney maintains its board is largely independent, most directors have some ties to Eisner or the company, such as his personal lawyer, Irwin Russell, or former Chief Financial Officer Gary Wilson.

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“What we are complaining about is a lack of independence of the board,” said B. Kenneth West of the College Retirement Equities Fund, which is withholding support for the five Disney directors up for election. It controls 7.4 million shares, or about 1% of Disney’s stock. New York State’s public employees’ pension fund became the latest of about 20 funds to say it will protest by withholding votes for five directors.

West acknowledges that Eisner has done a good job as CEO, although he notes that Disney’s performance the last five years has barely exceeded that of the Standard & Poor’s 500. Regardless, that’s not the point.

“Some people only take an action like this when there is poor performance. In this case, we are taking the high ground of good corporate governance,” West said.

Such pressure can work. Time Warner, whose stock has gone nowhere for years with an overly cozy board to management, recently moved to appease stockholders by naming to its board two high-powered outsiders: Hilton Hotels Chief Stephen Bollenbach and United Airlines Chairman Gerald Greenwald. Both are expected to turn up the heat on Chairman Gerald Levin to perform.

So far, Disney’s reaction to the growing discontent has been defensive, which carries the risk of further infuriating stockholders by coming off as arrogant. Last week, executives were saying that if any of the pension funds aren’t happy, Disney would gladly buy back their stock. As for the Ovitz debacle, the company’s spin from Day One has been to minimize the cost by comparing it with the losses on a bad movie or two.

Eisner and Disney would do better today to take a conciliatory approach. Acknowledge concerns of the stockholders, promise to look into matters and vow to do better.

As for the Ovitz fiasco, it’s a little stickier for Eisner because it’s so personal. It was Eisner’s call to hire his best friend; the fact that it didn’t work out in so public a way casts a big shadow over the meeting.

Eisner would be wise to take the Mukluk approach. Mukluk is the most famous dry hole in the history of the American oil business. A batch of oil companies, thinking they had within their grasp one of the biggest finds ever, instead were forced in the early 1980s to eat tens of millions of dollars in losses when the Alaskan drilling came up dry.

At shareholder meeting after shareholder meeting, embarrassed oil executives were grilled on how they could have been so dumb. The only explanation was that it is nature of the business: Sometimes every indication points to a gusher, but you end up dry.

Like the Ducks’ Hebert, Eisner will inevitably have to deflect a slapshot that comes his way when he’s asked about Ovitz. He’d be wise to note that sometimes in a business such as entertainment, you think you’ve hit a managerial or talent gusher. Instead, as Eisner found out, you can get a dry hole.

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Mixed Review

Despite better-than-expected company profit for the fiscal year ended Sept. 30, Disney Chairman Michael Eisner may have shareholders asking tough questions at today’s annual meeting. Some of Disney’s highlights over the last year:

* Jan. 9: Eisner agrees to a seven-year contract extension valued at about $250 million, including what may be a record grant of 8 million stock options.

* Dec. 12: Michael Ovitz resigns as Disney’s president after 14 months, taking $39 million in cash severance and 3 million stock options now worth more than $50 million.

* Dec. 2: The remake of “101 Dalmatians” rakes in a five-day Thanksgiving weekend high of $46 million. Other strong Disney films include “Phenomenon” and “The Rock.”

* Oct. 8: The Anaheim City Council votes to spend up to $546 million to make possible a new $1.4-billion Disney theme park.

* April 9: Former Walt Disney Studios Chairman Jeffrey Katzenberg sues the company for more than $250 million he says he is owed for building up the company’s filmed entertainment division.

* April 3: Paving the way for Disney to buy the ballclub, Disney, the California Angels and Anaheim agree the team will play in a refurbished Anaheim Stadium.

Source: Times reports. Researched by JENNIFER OLDHAM / Los Angeles Times